Guatemalan Financial Market – From Local to Regional
The financial market in Guatemala is stable, with the major players maintaining their positions for a long period of time. This is primarily because of the long-lasting relationships between the financial institutions and the industries behind the economic growth of the country.
The region is composed of several small economies that were historically characterised by a local mentality, even though they are geographically close together. However, the need to seek new markets and take advantage of economies of scale resulted in the expansion of many key players in each local market into other markets throughout the region. Local financial institutions seeking to access new clients and to continue to provide financial services to their existing clients also expanded their operations in the region.
This expansion presented many challenges. The key players had to learn how to navigate different regulatory bodies, deal with cultural challenges and connect with new clients that already had strong relationships with local banks.
Nevertheless, these expansions were successful to the point that some financial institutions received capital infusions from other financial institutions outside the region.
As of today, there are 17 registered banks and ten authorised financial groups in Guatemala, five of which also have operations outside Guatemala.
As is to be expected, the increase in regional operations resulted in an increase in demand for multi-jurisdictional financing facilities. Clients seek to consolidate their debt in one facility and thereby achieve better financial terms, with just one contract to administer, one set of covenants and restrictions and one relationship to manage, either directly with the sole lender or through the Administrative Agent in a syndicated loan.
Multi-jurisdictional facilities tend to be more complex than a facility where the lender, debtor and assets are in the same jurisdiction. The complexities involved in a multi-jurisdictional facility include the following:
To successfully navigate these challenges, it is key that financial institutions partner with a legal adviser who is well familiarised with multi-jurisdictional facilities, understands the local regulation and has experience in navigating the plurality of legislation that will govern both local and foreign documents.
Additionally, excellent communication and a focus on teamwork are key among all local counsel in order to successfully navigate these challenges. That is why it is so important for both creditor and borrower to ask themselves before engaging local counsel how much all proposed local counsel have worked together in the past.
Choice of Law
New York law has traditionally been the primary choice of law for multi-jurisdictional facilities, as it provides all the key elements to be considered as the preferred choice of law in these types of transaction.
The stability of its regulation on banking and finance, the abundance of case law regarding all relevant material matters and the sophistication and experience of New York counsel make this jurisdiction one of the most appealing for multi-jurisdictional facilities.
However, local financial institutions are becoming more comfortable in choosing other legislation as the governing law for facilities. As other jurisdictions evolve, the governmental authorities become more familiar with complex multi-jurisdictional structures and local counsels become more and more sophisticated and specialised, it is more common to hear the financial institutions ask the “What choice of law?” question.
The answer is resolved on a case-by-case basis. If looking to move away from New York law as the governing law of the facility, both businesses and legal teams usually recommend other jurisdictions to be considered. Out of all these jurisdictions, is there one that makes more sense? Where will most of the funds be allocated? Where will the collateral be located? Is there local counsel in that jurisdiction that has the expertise to act as a local counsel and lead counsel to the transaction? Does the considered jurisdiction provide the elements of certainty, sophistication and enforceability? Does the borrower have a specific preference?
New York law was, is and will continue to be the go-to choice of law for complex multi-jurisdictional banking and finance transactions. However, there is now a tendency to assess other alternatives that might not have been considered previously.
New Options and Financing Sources in Guatemala
Globalisation and cross-border lending have opened new financing alternatives for borrowers. Although still not available for medium to small companies, the international debt capital markets have proven to be a reliable option for Guatemalan issuers in the last two decades. International debt IPOs have grown especially in the last ten years, attracting issuers from diverse industry sectors, such as telecoms, energy, agrobusiness and banking.
Such issuances have been fruitful and attractive for international investors and bond holders, opening up the appetite in the international capital markets for Guatemalan and Central American borrowers. Just a few months ago, a Central American conglomerate of power plants owned by a company based in Guatemala issued the first-ever green bonds in a ground-breaking and very successful transaction.
Investment funds and private equity funds have also had their share of the pie, providing different and innovative financing and short and mid-term investment strategies that suit Guatemalan companies very well in certain scenarios.
Similarly, private banking is on the rise, both from abroad and locally, as local companies diversify their business and portfolios, and make clever spin-offs to create private banking companies that have taken a chunk from the financing market that was dominated mainly by US, local and regional banking institutions. These newly created ventures benefit from staying closer to potential Guatemalan and regional clients, with a much more personal relationship, attractive financing terms and flexible structures.
Multilaterals have also stepped up to the game by becoming more agile, offering certain benefits that only such institutions can provide (eg, ad hoc or imbedded umbrella political risk insurance, longer terms, competitive financial terms and flexibility). Additionally, such institutions have become more agile and accommodating to clients' needs, which has made them more competitive in Guatemala and across the region.
Finally, local and regional banks – the traditional financing source just a few years ago – have become more international and sophisticated, and are now legitimately fighting for a share in the market. We now see local syndicated loans, complex loan and security structures, multi-jurisdictional financial transactions and other “tropicalisation” of financial schemes and arrangements being implemented locally under Guatemalan law. A few years ago, it was unthinkable that such deals could take place, as lenders often preferred NY law-governed transactions and deals.
On top of it all, Guatemala has steadily maintained its investment grade ranking and sound macroeconomic policies, providing certainty to borrowers and local and international lenders alike.
Although still a small market, there is a strong movement in the Guatemalan technology field regarding fintech. The key players entering the area are financial institutions exploring the options and alternatives, some start-ups, and investors and regulatory bodies looking into a variety of topics, such as electronic and digital payment systems, blockchain, crowdfunding and e-money matters.
Guatemala does not yet have any regulation on fintech matters. However, the bank regulator has been investing in training its staff and gathering knowledge, foreseeing that regulation is needed or will be in the very near future. Therefore, there is currently a lot of room to manoeuvre, but investment and lending for fintech start-ups and projects are very limited.
There are a few cryptocurrency projects being structured, and investment in such projects is neither limited nor restricted. However, crowdfunding is limited in certain cases due to local bank regulations on financial intermediation. Similarly, public trading and exchange regulations have proven to conflict with the fintech way of doing things. Therefore, such financial regulations will need updating and amending.
Local debt issuance is scarce as a result of a weak stock market. A few companies are interested in exploring and venturing into such financing alternatives, but have tended to opt for traditional bank loans due to local regulator bureaucracy, uncertain laws, complicated legal requirements, long check lists, high expenses and uncertainty on how the market and potential investors would react, in addition to the fact that Guatemala has a very liquid banking system.
Regardless of this, several fintech companies have prospered, especially with peer-to-peer lending and financing brokerage, acting as a medium or platform between potential individual lenders and borrowers. Special fintech services continue to be implemented, taking advantage of the growing remittances market.
Sadly, only a few very incipient incentives have been enacted in Guatemala for fintech entrepreneurship and ventures, basically consisting of fast-track incorporation matters, lower incorporation and paid-in-capital requirements and very limited tax breaks. As a result, such incentives have proven to be ineffective and irrelevant to incentivising any proliferation or growth among local fintech companies.
However, judging by what is happening around the world, it seems very likely that fintech is here to stay and that, slowly but surely, things will start to change for the better, motivating the development of the local fintech market in the next decade.
Withholding Tax and Deductible Expenses Regarding Foreign Loans to Local Borrowers
As per the applicable tax law, interest payments abroad are subject to 10% withholding tax, unless the lender is a bank, financial institution or multilateral duly established in its country of origin and authorised as such in its relevant jurisdiction.
This section of the Income Tax Code was enacted some years ago to prevent local borrowers and companies from creating sham financing structures to transfer benefits as interest to tax-beneficial jurisdictions.
Another related issue regarding cross-border lending is the tax deductibility of interest on foreign loans, which is also conditional. Under current local law, interest payments enjoy income tax deductibility only if the bank, financial institution or multilateral is authorised to conduct banking and financial activities in its own country of origin.
Tax authorities have been relatively accommodating to formal foreign lenders, but this provision is still seen as a minor hurdle and a potential source of risk to transactions that require internal review and sometimes motivates requests for binding opinions from tax authorities. This is especially true in more complex transactions that go beyond a simple loan agreement.